Retirement Firms Target Younger Investors

A new study by retirement and investment trends research firm Hearts & Wallets, LLC found that more retirement firms are considering the lifetime value of consumers--currently 55%, up from 43% in 2010-showing an increased focus on younger investors.

The survey included nearly two dozen leading distributors, employer-sponsored plans, insurers, asset managers and intermediary platform solution providers with more than $12 trillion in AUA and more than $10 trillion in AUM, serving more than 50 million retail customers and supporting more than 60,000 registered reps.

When thinking of lifetime value, that means a focus on investors in the accumulation phase of saving. "Traditional firms are becoming more interested in younger investors. They realize that acquisition should be a priority and they have to think about acquiring investors when they are a little younger generally in their late 30s and 40s," said Chris Brown, principal Hearts & Wallets. That's when people form those lasting relationships," he added.

Brown indicated that increased competition for the larger accounts of older investors could be driving this newfound interest. "There was more of a thought in the past that it was cheaper to acquire accounts later when the balances are larger rather than trying to bring people with smaller balances along," he noted.

"Now that's shifting, possibly because of increased competition for people in their 50s and 60s. Firms are realizing that it's expensive to get the assets when people are at that point and maybe it is a better strategy to take in smaller accounts and build the relationships," he stated.

Messaging for investors in the accumulation phase is a big piece of the puzzle. "Part of the study is that we went out and looked at the homepages of the leading online BDs and enrollment kits for 401(k) providers. A lot of the goals and messaging are not aligned with the needs of younger investors. We've had comments from people in our focus groups about the "typical old white guy" who is seen in the commercials for the brokerage firms," Brown said.

Preparing not only for retirement but also for life's financial challenges is important to younger investors. "Some of the things we saw were that both the enrollment kits and the websites tended to leave out a lot of the needs and goals of younger investors. The focus is so much on retirement that they forget about the things younger investors are looking for," said Brown. "This includes building an emergency fund, saving for college, children they don't have yet and a home," he noted.

Pricing is another touchpoint when it comes to the younger demographic. "The fees are another issue. Younger people are looking for clear pricing, they want to comparison shop. They want to know the cost and how it compares to other firms. There are some firms that do a nice job of laying out the costs. They say here is what it costs to use our platform versus our competitors," Brown stated. "We think if these firms changed the revenue model a little bit it could be profitable. The margins won't be as high as most of these firms are public companies and they have quarterly earnings to meet. They have concerns about keeping margins where they are and it's tough to change the business model," he added.

Brown cites two companies that could shake up the space--NestWise (a business unit of LPL) and Learnvest. Instead of giving investments they give service levels and the cost.

Still the revenue model for firms like NestWise and Learnvest are yet to be proven. It was announced in late August that LPL would be shuttering NestWise September 1 due to unmet growth targets.

To increase participation among investors in the accumulation phase, providers are working with plan sponsors to target specific demographics, making use of technology and utilizing behavioral driven innovations.

"We have a comprehensive plan review report broken up by age bands and the age bands are 30 and younger, 30-39, 40-49, 50-59 and 60 plus," said John Prescott, vice president of relationship management and strategic initiatives for CPI Qualified Plan Consultants. "It reports to the employer and the advisors the participation rates and the deferral percentages on each bracket. If the employer and the advisors select a bracket that is not participating as much as it should, we put together PowerPoint presentations that they can use in specific employee education meetings," he notes.

Using technology that younger investors are familiar with is another part of the strategy, Prescott said. "We have 60 iPads that we use in enrollments for the younger generation and they really relate to that. 'This is my generation's equipment.' We hand out 20 of these in a classroom setting. We let them use the iPad to access their participant account.

"Another tool is auto enrollment, which we are pushing hard. It's a proven fact that people do not 'un-enroll.' This is a great tool for all age brackets and probably more effective for the under 40 crowd," said Prescott.

Prudential is using behavioral cues in a soon-to-be released plan that is being tested primarily on millennial companies.

"We've tested a few retirement readiness meters. The first didn't do so well. It was overly sophisticated, there was too much depth on the algorithm," said George Castineiras, senior vice president of Prudential Retirement's Total Retirement Solutions. One of the clients we tested it on is made up of 70% millennials-also known as Generation Y. The greatest response was, 'I like this but I don't know what you are asking me to do to elevate my success rate,' " he stated.

To more clearly articulate the purpose of the meter, Castineiras indicated the program was changed to focus on achievement. "We changed it and now we call it an achievement meter. This is behavior based. If you are contributing you get a point, if you are contributing at a higher level you get another point, if you are optimizing the match from the employer you get another point, if you don't have any outstanding loans, you get another point," he stated.

"That made it much easier for individuals to understand right behaviors. It's driving on average two to three behavior changes that were not in place before," noted Castineiras.